Income Tax Savings Example:
Using your home as an example, the options to gift outright or in trust produce very different income tax results at the time of a future sale by your beneficiaries.
• Paid $50,000 for your home
• Current value is $250,000
Outright Gift of Home Home Placed in Trust
Capital Gain $250,000 - $50,000 = $200,000 $250,000 - $250,000 = $0
Estimated Tax $40,000 $0
The combined federal and state income tax of approximately $40,000 is eliminated by retaining the home in your estate at death by providing your beneficiaries with a stepped-up cost basis to the value of the home at your passing. A savings of $40,000 is created for your family with one simple planning tool.
Estate Tax Facts:
Estate Tax Exemption – The limit set by law, above which, your assets will be taxed if inherited by beneficiaries other than your spouse.
2018 Federal Estate Tax Exemption: $11,180,000 per individual
Top Tax Rate for Taxable Estate: 40%
2017 (after 4/1) NY Estate Tax Exemption : $5,250,000 per individual
Top Tax Rate for NY Taxable Estate: 16%
2017 NJ Estate Tax Exemption: $2,000,000 per individual
Top Tax Rate for NJ Taxable Estate: 16%
*NY law also includes an estate tax cliff. If a decedent’s estate exceeds 105% of the exemption, the entire value of the estate will be taxed and does not allow any exemption. If planning is not implemented to avoid this scenario, it could cost families hundreds of thousands of dollars.
Inheritance Tax Facts:
There is no federal inheritance tax. Only certain states tax the assets received by certain beneficiaries. New York does not have an inheritance tax.
New Jersey inheritance tax applies to assets transferred to beneficiaries other than immediate ascendants, spouse and descendants (Class A) or exempt organizations (Class E). For example, a sibling or the spouse of a deceased child would be taxed at the following rates depending on the amount they receive as a beneficiary of your estate.
First $25,000 - No tax is due
Next $1,075,000 - 11%
Next $300,000 - 13%
Next $300,000 - 14%
Over $1,700,000 - 16%
Any beneficiaries not falling within another class are considered a Class D beneficiary, taxed at 15% for the first $700,000 and 16% for everything over $700,000. http://www.state.nj.us/treasury/taxation/pdf/other_forms/inheritance/transferinheritanceclasses.pdf
Gift Tax Facts:
Neither New York nor New Jersey have a gift tax. However, the federal government has an annual gift exclusion and a lifetime gift tax exemption.
The 2018 Annual Gift Exclusion is $15,000. This means that you can gift up to $15,000 to as many individuals as you like without filing a gift tax return (Form 709) or utilizing a portion of your lifetime gift tax exemption.
The 2018 Lifetime Gift Tax Exemption is equal to the federal estate tax exemption of $5,600,000. Although the exemption amount is the same if gifts are made during life or left to beneficiaries at death, there is a potential benefit to making lifetime gifts created by its tax exclusiveness (rather than the tax inclusive nature of the estate tax). Any assessments of this kind would also consider the income tax impact to ensure the overall minimization of all tax liabilities.
